Smartphones are deceptively affordable. If you buy an iPhone 5s unlocked, it will cost you $649 upfront for a 16GB model, yet if you bundle that same phone with an AT&T contract, it will cost you just $199 upfront. The rest of the balance is subsidized by your carrier upfront, and paid off over the next 24 months in monthly installments.

It’s a decent system that results in massive profits for carriers, but at the cost of an upfront payment to Apple. Go figure, though, AT&T would rather just rake in massive profits without that upfront payment… which is why CEO Randall Stephenson is now saying the are “unsustainable.”

Arguing that smartphone penetration is reaching saturation point at 75 percent, Stephenson says:

When you’re growing the business initially, you have to do aggressive device subsidies to get people on the network. But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can’t afford to subsidize devices like that.

He might have a point, actually. For every $199 iPhone 5s that AT&T sells you, Ma Bell has to write a check to Apple for $649. That’s a $449 upfront payment gathering interest that AT&T won’t fully recoup for another 20 months or so. Multiply that by millions of devices, and you see the problem.

To Stephenson, the solution is to incentivize bringing your own device to the network and keeping older devices longer, as well as to convince customers to pony up more upfront when they buy a new iPhone.

If AT&T is talking openly about this, you better believe that other carriers are seriously considering cutting down on iPhone subsidies too. You might want to get in the habit of buying your iPhones unlocked now.

Seen this, works well, look no further than T-Mobile.. AT&T likely wouldn’t even have considered it if T-Mobile wasn’t doing so well with it. Ironically, AT&T’s version ends up costing you more .. once you take into account the monthly financing for the phone and the $15/mo off on the cell bell. Somethings off about that..

Howie Isaacks

I’m not surprised by this move. All it takes is for one carrier to try something new, show some success, and all of the others follow. If AT&T follows up by lowering their rates for service over time, then I’m fine with this. I don’t mind paying full price for an iPhone since it would give me total freedom without the contract, or the fee associated with canceling service. This might also result in better customer service since customers would no longer be tied to a carrier because of the contract. When a carrier thinks of you as being bound to them, they have little incentive to keep you happy. I’m wondering what this will do to the demand for iPhones. I just hope that Apple doesn’t respond to this by producing crappy cheap phones.

newsome

Well, then I should see a drop in my monthly rate and the elimination of ETFs if I’m paying full price for the phone. What do you think the odds of those two things happening are? Zilch. No, I’m betting that AT&T (and by extension Verizon – what one does the other does) wants to keep rates the same, which means HUGE profit increase for them since they won’t have to subsidize the phone anymore. They’re not going to go backward on rates. I can’t see them wanting to give up the ETF, lock-you-in, cash cow either.

No, this is just another way to give the customer less and charge them more, all the while raking in record profits. They’re not losing money subsidizing the phone – they recuperate it during the life of the contract or through the ETF. Poor sad AT&T, they’re going broke. Give me a break.

lwdesign1

My heart bleeds for AT&T who have been raking in roughly $80 per month from me since 2001 (works out to $11,520 over 12 years). Yes, they may have upfront costs for each new iPhone customer, however, what about all those TENS of MILLIONS of customers they already have who regularly pay $80 and more every month, and who don’t frequently upgrade their phones? AT&T are making BILLIONS from all of us, but they want MORE. They are insanely profitable but still want to squeeze subscribers for more. The interesting thing is that if we buy iPhones for full price, we still get charged the same monthly fees without any discount. So AT&T wins any way you look at it.

kleptco

I wonder what the mainstream market’s appetite is for $600 iPhones. Apple needs to do a $300 iPhone.

ItsNgataMe

I’m all for buying a new $649+ iphone every year with zero carrier subsidy, as long as they decrease my plan by 20 bucks a month. In fact ive been ASKING to do this for awhile now, it ends up being cheaper for everyone

Atienne

Several things will happen.People will keep phones longer, or switch carriers, or a new business model will spring up where you buy a mortgage for a phone and pay monthly like you do for a home or car. Ive had the same iPhone for two years and it works fine. Im betting it will last for a few more no matter what comes out.

About the author

John Brownlee is a Contributing Editor. He has also written for Wired, Playboy, Boing Boing, Popular Mechanics, VentureBeat, and Gizmodo. He lives in Boston with his wife and two parakeets. You can follow him here on Twitter.

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